BY KALPANA SAHOO
Introduction:
In early August 2025, U.S.–India trade relations reached one of their most tense points in recent history. The administration of U.S. President Donald Trump imposed a steep tariff regime on Indian goods—first at 25%, and then, within days, effectively doubling the tariff burden to around 50% on many product categories. The decision, driven by a mix of geopolitical, economic, and domestic political considerations, has triggered intense debate on both sides of the globe.
India, long considered a strategic partner to the U.S., is now caught between defending its sovereignty in economic and foreign policy decisions and safeguarding its export-driven sectors from major shocks. This report explores why the tariffs were imposed, the timeline of their escalation, their likely impact on both economies, India’s legal and policy tools to respond, and the broader geopolitical implications.
Background — U.S.–India Trade Relations Before August 2025
Historic Trade Partnership
The United States is India’s largest trading partner, with bilateral trade exceeding $190 billion in 2024. The relationship has typically been marked by cooperation in technology, defense, and energy, but persistent disputes over tariffs, market access, and trade imbalances have occasionally strained ties.
Historically, India has maintained relatively higher tariff rates than the U.S.—around 12% on average compared to the U.S. average of just over 2%. Washington has long complained that these barriers make it difficult for American goods—from Harley-Davidson motorcycles to Californian almonds—to compete in the Indian market.
Early 2025: A Preemptive Olive Branch
In early 2025, anticipating U.S. concerns, New Delhi took steps to reduce tensions:
Lowered tariffs on high-profile U.S. exports such as motorcycles and whiskey.
Increased imports of U.S. liquefied natural gas (LNG) and defense equipment.
Offered to review “non-tariff barriers” and consider more open procurement policies.
Despite these moves, the U.S. pursued a more aggressive tariff policy as part of a global trade reset.
The “Liberation Day” Policy and First Tariff Wave
On April 4, 2025, the Trump administration unveiled its “Liberation Day” trade policy—a sweeping plan to reset trade terms with virtually all partners. The baseline was a 10% global tariff on imports to the U.S., combined with additional country-specific surcharges based on perceived unfair practices.
India was hit with a 16% additional charge on top of the 10% baseline, bringing its total effective tariff rate to 26%. This measure was framed by Trump as “reciprocal,” claiming India’s average tariff rates were disproportionately high.
Though this was already a significant escalation, it paled in comparison to what was coming.
The August 2025 Escalation — 25% to 50% Tariffs
The Trigger
By late July, Trump publicly criticized India’s continued imports of Russian oil and defense equipment, despite Western sanctions and calls to reduce dependency on Moscow. The administration argued that such purchases undermined U.S. foreign policy goals, particularly in relation to the war in Ukraine.
On July 30, 2025, the White House announced a 25% tariff on all Indian imports, effective August 1. This was in addition to the existing 26%, pushing the total rate above 50% in many categories.
Sectoral Scope
Not all products were equally affected.
Targeted sectors included:
Textiles and apparel — one of India’s largest export categories to the U.S.
Jewelry and gems — high-value, labor-intensive goods at risk of losing U.S. market share.
Seafood and agricultural products — especially shrimp and spices.
Auto components — impacting small and medium manufacturers in India’s industrial belts.
Exempted sectors (for now):
Pharmaceuticals — a critical supplier to the U.S. healthcare system.
Mobile phones and electronics — to avoid disruptions in global tech supply chains.
India’s Response — Measured, Not Retaliatory
The Indian government, led by Prime Minister Narendra Modi, signaled a “measured, calibrated and professional” response. Unlike in previous trade spats—such as the 2018–2019 steel and aluminum tariff dispute—New Delhi refrained from immediately imposing retaliatory duties.
Key Strategic Moves
1. Talking First, Fighting Later
India is focusing on negotiations with the U.S. instead of jumping straight into a tariff war.
The idea is to protect exporters, farmers, and small industries while trying to get the U.S. to lower its tariffs.
India has offered to reduce or remove import duties on some U.S. goods if America also eases its tariffs on Indian products.
2. Using WTO Rules
India told the World Trade Organization (WTO) that it has the right to retaliate by putting tariffs on some American goods.
So far, India has not fully used this option because it still hopes to solve things through talks.
3. Finding New Buyers
To avoid depending too much on the U.S., India is expanding exports to more than 50 countries, especially in West Asia, Africa, and Southeast Asia.
India is also signing new trade agreements with the UK, European countries, ASEAN nations, and the Gulf countries.
4. Making India Stronger at Home
Under the Aatmanirbhar Bharat (Self-Reliant India) plan, the government is boosting manufacturing in sectors like technology, defense, space, and semiconductors.
PLI schemes (Production Linked Incentives) are being given to encourage companies to produce more in India.
Tax and GST changes are planned to make products cheaper and boost local demand.
5. Helping Exporters Directly
The government is offering credit guarantees and special loans for businesses hit by U.S. tariffs.
This helps exporters continue trading without losing too much money.
6. Short-Term Tricks for Exporters
Indian exporters are adjusting prices, creating special “Make in India” premium brands, and partnering with big U.S. retailers to keep their market share.
They are also shifting to new markets like the EU, Canada, and Latin America.
7. Current Situation (August 2025)
U.S. tariffs on Indian goods are still high (around 50%).
India is still open to a big trade deal with the U.S. but is clear about protecting its “red lines” — meaning it won’t agree to anything that harms its farmers or key industries.
The Prime Minister has promised more support for domestic industries and a stronger push for self-reliance.
Legal Context — Tariffs Under Indian Law
Domestic Authority
In India, tariffs are regulated under:
The Customs Act, 1962 — empowers the central government to levy duties on imports and exports.
The Foreign Trade (Development and Regulation) Act, 1992 — governs India’s trade policy framework.
The Finance Act (annual budget) — often used to adjust tariff rates in line with fiscal goals.
Economic Impact
Impact on Indian Exporters
The sectors most at risk:
Textiles & Apparel — India’s competitive pricing advantage in the U.S. could evaporate under 50% tariffs, shifting orders to Bangladesh, Vietnam, or Mexico.
Jewelry — Luxury buyers in the U.S. may switch to alternative suppliers, reducing demand for Indian gems.
Seafood — The U.S. is a major buyer of Indian shrimp; higher prices could slash volumes.
Auto Components — Supply chains could be disrupted as U.S. assemblers seek alternative sourcing.
Impact on U.S. Businesses and Consumers
Price Inflation — Tariffs act as a tax on imports, pushing up prices for U.S. consumers.
Supply Chain Disruption — Sudden shifts away from Indian suppliers could take years to stabilize.
Political Pushback — U.S. importers and retail groups have already begun lobbying against the tariffs.
Geopolitical Underpinnings
The tariff escalation cannot be seen in isolation—it’s tied to broader U.S. geopolitical strategy.
Russia Factor — India’s decision to maintain robust energy and defense trade with Russia is central to Washington’s discontent.
China Containment — Ironically, U.S. tariffs on India could push New Delhi closer to Moscow and Beijing, counter to American strategic goals.
Domestic U.S. Politics — Tariffs are a signature Trump policy tool, appealing to his base by projecting toughness on trade.
The US dollar plays an indirect but important role in US–India trade clash.
Global Trade Currency
Most international trade, including US–India transactions, is conducted in US dollars.
If there’s a trade dispute (tariffs, sanctions, restrictions), the flow of dollars between the two countries can be disrupted, affecting settlement of trade bills.
Exchange Rate Impact
A trade clash can weaken market confidence, causing the Indian rupee to depreciate against the dollar.
This makes imports from the US more expensive for India, increasing costs for businesses and consumers.
Capital Flows & Investments
The US dollar is the world’s reserve currency. If tensions rise, US investors may pull out investments from India, demanding their returns in dollars, which puts more pressure on the rupee.
Monetary Policy Links
Any change in the US Federal Reserve’s interest rates (linked to the dollar’s strength) can amplify the impact of a trade dispute.
A strong dollar during a clash can worsen India’s trade deficit with the US.
Bilateral Negotiations
Dollar dominance gives the US a strategic advantage in trade talks. If India wants to bypass dollar settlement (using rupee–dirham, rupee–ruble, etc.), it can reduce this leverage — but such moves often happen after tensions rise.
Conclusion
The 2025 U.S. tariff escalation against India is more than a trade dispute—it’s a geopolitical test of wills. Washington is using economic leverage to influence India’s foreign policy decisions, while New Delhi is striving to balance its strategic autonomy with the realities of a globalized economy. Exporters in textiles, jewelry, seafood, and auto parts will bear the brunt of the shock. In the medium to long term, India’s resilience will depend on its ability to diversify markets, negotiate smartly, and adapt its domestic policies to changing global trade dynamics. For now, the world watches as two of the largest democracies navigate a complex mix of commerce, politics, and power.
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